Bitcoin could be on the edge of a cliff

Jonathan Garber

Mar. 16, 2017, 03:01 PM

Thomson Reuters

Let me be clear: I do not trade bitcoin, but I do write about it often. Before going into journalism, I spent my days trading. I learned a lot about technical analysis during that time, and right now, technical analysis spells huge trouble ahead for the cryptocurrency.

Let's recap what has been going on in the bitcoin market so far this year.

Since then, bitcoin has ripped higher by more than 50% even in the face of several pieces of bad news.

First, China's biggest bitcoin exchanges said they were going to start charging a 0.2% fee on all transactions (previously there was no fee). This was significant as nearly 100% of bitcoin's trading volume takes places on China's exchanges.

Then, China's biggest exchanges said they were going to block withdrawals from trading accounts.

But bitcoin kept climbing higher.

It put in a record high of $1,327 a coin on March 10 as traders piled in ahead of the US Securities and Exchange Commission's ruling on the Winklevoss twins' bitcoin exchange-traded fund (ETF). The SEC denied the ETF. There are two more SEC rulings on the way, the next being on March 30. Neither one is expected to pass.

That ruling sent bitcoin crashing 16% lower, but again it was ultimately resilient in the face of bad news. Prices snapped back up in overnight trade and ended the following session above the previous day's opening price.

All of those ups and downs, though, have left the cryptocurrency in a precarious position. Take a look at a bitcoin chart:

Investing.com

The chart pattern appears to be putting in a classic double top pattern. In very simple terms, that's describing those two peaks you see highlighted above.

What the double top does, is give us a clue to where traders will go from buying to selling bitcoin. In order for this pattern to be activated, bitcoin would have to close below the neckline, which appears near the $1,100 level.

And while that hasn't happened yet, there is another troubling sign that's popping up on the charts.

bitcoinity.org

Bitcoin volume exploded into the end of 2016, but has vanished in 2017. This means that as the price was going up, the drop in volume didn't support the price trend. In other words, there wasn't any conviction behind the move. It appears that the transaction fees implemented by China's biggest exchanges have caused participation to dry up.

So where is bitcoin headed?

If the cryptocurrency falls below the neckline drawn on the first chart, the charts suggest a trip to the $900 area is likely. That's $300 a coin less than it's current level, or a 25% drop.